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5 "Tells" that the Stock Markets Are About to Reverse

U.S. Stock Market Investors Set Up to be Fleeced, Triple Top?

Stock-Markets / Stocks Bear Market Sep 10, 2012 - 04:29 AM GMT

By: Clive_Maund

Stock-Markets

Diamond Rated - Best Financial Markets Analysis ArticleMost investors were duped by the mainstream financial media into thinking that the broad US stockmarket made an important upside breakout last week, but according to our charts it did no such thing. Sure the market did breakout to new post 2008 - 2009 crash highs, but it DID NOT break out to new highs on longer-term charts, and DID NOT break out upside from the large bearish Rising Wedge that it remains stuck in.


Our 4-year chart below, which shows the uptrend from the 2009 lows in its entirety, makes plain that the market is in the late stages of a huge strongly converging, and thus strongly bearish, Rising Wedge, which results from a steady diminishing of buying power. As we can see it must soon break out from this pattern and if the breakout is to the downside it is likely to plunge, which is likely given the looming Fiscal Cliff which will ravage corporate profits - if it succeeds in breaking out upside it will buy it more time, but this is considered a much less likely outcome.

SPX

Our long-term 20-year chart shows that the market has risen up into a zone of strong resistance approaching its 2000 and 2007 major highs - so much for the great breakout. Looks more like a great place for it to turn tail and start another bearmarket.

SPX

So what has been happening elsewhere while investors in US markets have been led to the edge of the cliff by the QE pied piper? Investors in Chinese markets do not seem so enthralled with the future outlook at all, as our 4-year chart for the Shanghai Composite index makes clear. It is incredible to think that while the US markets have wafted higher by about 26% since the start of 2010, the Chinese market has slumped by 36%.

Shanghai Composite Index

So which group of investors is right about the outlook for the global economy? Before you go ahead and place your bets you ought to consider the following chart for the Baltic Dry Shipping Index ...

Baltic Dry Index

... and we can put this all together on one disturbing chart that enables us to make a direct comparison between these 3 elements.

SPX

This Baltic Dry Index is a truly frightening chart, as it is already at the dismally low extremes plumbed during the depths of the 2008 market crash. If it is a reflection of the true state of affairs it means that world trade is imploding - and that means that the US stockmarket is hanging on a thread, with investors smoking the QE hopium pipe. Don't believe it? - before you go off searching for evidence that this chart is somehow skewed and no longer functioning as a true reflection of the state of the world economy, you might like to take a look at the following 2 charts, and then try your hand at finding an excuse for them too.

The 1st is a chart for the US trash index, and while there is scope for distortion here as this is trash carried by rail freight, it is certainly not encouraging, and as we can see it nosedived around the time of the 2008 crash and is plummeting again right now.

AAR Waste Carloads

Before you dismiss the previous chart as a load of rubbish take a look at this next chart which shows the Velocity of Money going back many years, as we can see it has recently slowed to an alarmingly low level - well below its lows at the depths of the 2008 market crash. Are you starting to get the picture yet? - is the penny starting to drop?? Knock knock - is there anybody in there???

Velocity of M2

A big reason for the US stockmarket's rally last week was nothing to do with the economy and everything to do with the steep decline in the dollar, so it was just rising to compensate for the dollar drop. The main thing about the dollar is that it has been written off by many commentators as "toast" and every time that has happened in the past it has made a comeback. Could it be different this time? Could it really be toast this time round? - anything is possible but the probability of a rebound here is high for reasons that we will now examine.

The entire uptrend in the dollar from the lows of July last year can be seen to advantage on a 14-month chart. On this chart we can see that it appears to have broken down from the main uptrend, a development presaged by the earlier weaker impulse wave that took it up to about 84 in July. This may mark the start of a breakdown from a bearish Rising Wedge, or the channel may be becoming less steep as shown, but with adjusted channel support and support from earlier highs and a rising 200-day moving average close by, it is believed to be too soon to write off the dollar. We see also on this chart that the dollar index is at its normal oversold limit for this uptrend. All this means that the dollar could turn up soon.

US Dollar Index

With 90% of investors in US markets now looking to the Fed to save the day by waving its magical QE wand, the scope for disappointment is now huge - and there may be nothing to look forward to after the FOMC meeting on the 13th - and what if they do a big QE immediately? First of all it would take time to take effect, and there is no more time. Secondly, even if the banks stopped greedily sitting on all of the QE cash and let it out into the real economy, the result would be roaring inflation, and inflation is already high enough in the real economy, given that it is teetering on the verge of collapse. This inflation would impoverish consumers who would then spend less, thus adversely impacting corporate profits, resulting in falling stockmarkets - so they are damned if they do and damned if they don't.

Given that stockmarkets generally discount the economy 6 to 9 months ahead, it is clear that the situation for the market is already extremely dangerous - the only reason that it hasn't started down already is false hopes over a QE rescue.

The great thing about the current situation is that the latest new high by the market is giving us an opportunity to offload stocks at generally very favorable prices and to reverse position into bear ETFs and Puts, so that we can then feast on the ensuing severe decline while others are losing their shirts.

What will happen to gold and silver if the stockmarket goes into the tank? - well, past experience demonstrates that things could get ugly, although this time we have to factor in that before too much longer the bond market could tank too. Right now after a near vertical ascent silver has become super critically overbought on a short-term basis, meaning that there is a very high probability of it burning out, at least temporarily, very soon.

Silver 6-Month Chart

The latest COTs show Commercial short and Large Spec long positions for silver are at levels that in the past have marked reversal points. Could these readings get even higher? - anything is possible, they could fly off the scale, but this is clearly becoming an increasingly dangerous trade on the long side on a short-term basis at least.

Silver COT

It is suspected that Smart Money, well aware of the trap that has been set, will be taking profits ahead of the FOMC speeches on the 13th, leaving the news orientated little guy holding the bag as usual, so prices could start to come off the top even ahead of this date. It is therefore considered prudent to ditch the vast majority of any remaining long positions in the broad market early this coming week, and also to take positions in bear ETFs and Puts, according to personal preference. If prices rise after the statements any such rally is expected to be short-lived once reality sets in - with so many now bullish, there can't be many left to buy whatever comes out of the Fed.

One erroneous theory doing the rounds is that the markets "won't be allowed" to drop before the election, because this might damage Barack Obama's chances of re-election. There are 2 points to make regarding this. One is that the Democratic and Republican parties are 2 heads of the same hydra, and they are both controlled by the same ruling elites, so that the US elections are a farce. The second is that Israel is known to like Mitt Romney, the Republican candidate, so a market crash to get him in would suit them, although either candidate would serve equally well.

Now that their coats have grown back, it's time for US investors to get fleeced again!

Fleecing the US Investor

We will be looking at a raft of broad market bear ETFs and Puts on the site ahead of tomorrow's open.

By Clive Maund
CliveMaund.com

For billing & subscription questions: subscriptions@clivemaund.com

© 2012 Clive Maund - The above represents the opinion and analysis of Mr. Maund, based on data available to him, at the time of writing. Mr. Maunds opinions are his own, and are not a recommendation or an offer to buy or sell securities. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications.

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